Lawrence & Memorial offers $69 million for Westerly Hospital

New London — Calling it both a growth opportunity and a defensive strategy, officials at Lawrence & Memorial Hospital Corp. announced Wednesday that they have submitted a bid to acquire The Westerly Hospital for $69 million in financial and other assets.

The announcement was made as attorney Mark Russo, the special master in charge of receivership proceedings for Westerly Hospital, filed a petition in Rhode Island Superior Court for acceptance of a "stalking horse" bid from L&M.

Russo said Wednesday afternoon that he had negotiated with "several different hospital systems," but L&M "turned out to be the best one," and the two parties worked to develop terms of the L&M bid through a collaborative process.

Westerly Hospital sought protection from creditors in December by entering receivership, a legal process similar to bankruptcy. The hospital had incurred several years of operating losses.

The "stalking horse" bid is set as the benchmark against which all competing bids will be judged. Russo said five or six hospital systems have expressed preliminary interest in submitting a rival bid by the July 30 deadline.

He expects the court would conduct a sales hearing in mid-August and then choose one of the bidders to acquire Westerly Hospital. A closing would take place by January. Health care regulators in both Rhode Island and Connecticut would have to give final approval of the sale.

Among potential bidders is Westerly Hospital Holdco, a for-profit hospital management company affiliated with a New Jersey firm. In a meeting with The Day on Wednesday, Lugene Inzana, L&M's chief financial officer, noted that L&M and Westerly had been engaged in merger talks before Westerly entered receivership, but that after that process began, "it created a different dynamic" because receivership would have a certain outcome: Westerly Hospital would be sold to some entity.

"If not us, then who? We didn't want to see an aggressive for-profit chain in our backyard," he said.

L&M has made what it believes is a good and fair offer and "does not want to get into a bidding game" if a rival makes an offer the court deems more attractive, he said. As the "stalking horse bidder," L&M can receive a $1.5 million "break-up fee" as protection and reimbursement for the risk and expense of making and preparing the benchmark bid.

Under the terms of the L&M bid, both Westerly Hospital and L&M would continue to operate as independent, nonprofit community hospitals, but under a single parent company, Lawrence & Memorial Corp. Westerly Hospital would have an independent local board and representation on the L&M corporate board.

"It's not going to be just an outpost or a poor cousin," Bill Stanley, L&M's vice president of development and community relations, said. "We're not doing this just to keep Westerly Hospital open, or just to preserve the status quo. It's to keep it open and see it thriving again."

He expects the bid will be well received by the community that relies on Westerly Hospital, he said, because L&M is already a familiar institution with the same nonprofit, community hospital culture.

"We're right next door," Stanley said. "People already know who we are. They don't have to Google us to find out who we are. We've been here 100 years."

Medical staffs would remain independent, but there would be more referrals and collaborations between the two hospitals. When all of L&M's 280 beds are full, patients could be sent to Westerly, which has 125 beds, and some types of specialized care may be offered only at Westerly.

"There are some services that would work well there, like subacute care," Inzana said.

'A real chance at a future'

In its bid, L&M commits to maintaining Westerly Hospital as an acute-care community hospital for at least five years, and to continue all current clinical services for at least two years. It would inject $6.5 million of working capital to fund a turnaround plan to return Westerly to profitability. Within five years, it would invest an additional $30 million in facility improvements, technology, equipment and expanded services.

The two investments are critical, Russo wrote in documents submitted to the court, "because a buyer is not going to invest $36.5 million then close Westerly Hospital in year six."

Russo said that his consultants have reviewed L&M audits and determined it is financially strong, with an A-plus debt rating from the credit rating agency Standard & Poor's.

"L&M has the financial wherewithal to honor its commitments and sustain its proposed model," Russo wrote in documents supporting the bid.

Westerly Town Manager Steven Hartford, a member of the community stakeholders committee formed for the receivership process, called the L&M bid a "serious, substantial and credible offer.

"Clearly, the chance for maintaining jobs and services and a real acute-care Westerly Hospital is very attractive to the community," Hartford said. "The proposal requires a substantial financial commitment to invest in The Westerly Hospital both in physical improvements and expanded services. These commitments could mean a real chance at a future for our hospital."

The stakeholders group, he said, would seek to work with L&M on issues such as job protection, service continuation and the Westerly community's role in governance.

"This proposal is strong and very comprehensive, but we also feel it may prompt even better offers, and that would be a good problem," Hartford said.

There already is some overlap in the patient service areas of the two hospitals, particularly in North Stonington, Pawcatuck and Mystic, and several doctors are on the medical staffs of both institutions, Inzana said.

Joining the two hospitals under a single parent would enable both hospitals to better withstand changes in health care by streamlining management and finding efficiencies in purchasing and other areas, he said.

"The strategic rationale is that the landscape of health care is changing rapidly," he said, adding that as a result, many hospitals across the country are merging or acquiring smaller institutions. Together, Inzana said, L&M and Westerly Hospital can "create synergies and reduce overall costs" while at the same time growing services to become stronger.

Westerly Hospital's financial collapse, he said, was caused by losses incurred in its investment in creating the North Stonington Health Center in 2010, when it was already financially fragile.

"I think that, properly managed, with good business basics of blocking and tackling, the results could have been different," he said. Spending was not adequately controlled, and billing systems and revenue streams were not being managed properly, he said. Against that backdrop, Medicare reimbursement rates were stagnant or declining, compounding the financial problems.

"Our plan is to take what we feel are good business practices at L&M and insert them there," Inzana said. L&M plans to bring a process innovation system to Westerly "that has saved us millions by identifying areas where things can be done less expensively and more efficiently."

Despite its financial problems, Westerly Hospital has continued to provide high quality care, with strong medical staff and support from the community. Those assets made it an attractive partner for L&M, he said.

"This hospital has strong quality measures and patient satisfaction measures that are at least equal to L&M's," Inzana said.

Bruce Cummings, L&M president and chief executive officer, informed L&M staff about the bid Wednesday, and Westerly Hospital employees were notified by Russo. Because health care workers at the two hospitals are represented by different unions, the Westerly union contracts would have to be renegotiated if the L&M bid were approved, Inzana said.

He acknowledged that the acquisition of Westerly Hospital would be a major undertaking, especially at a time when L&M is about to begin another major project, a $35 million cancer center in Waterford.

"It is a lot, no doubt about it, and yes, it does come with some risk," he said. "The flip side is that it's a tremendous growth opportunity."